PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Financial statements filed as a part of this report (included in Appendix A):
Balance Sheet as of September 30, 1995 and March 31, 1995
Statement of Operations for the three and six months ended
September 30, 1995 and 1994
Statement of Cash Flows for the three and six months ended
September 30, 1995 and 1994
Notes to Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS AND CHANGES IN FINANCIAL POSITION
Approximately two and a half years ago, the Company began developing a new lease
product: Dealer-Direct Retail Leasing ("DDRL"). This new program is a signi-
ficant change in the way the Company markets, performs credit analysis, finances
and services leases. The Company is leaving the commercial equipment and vehi-
cle leasing market and entering the retail consumer automobile leasing segment
of the automobile financial services sector of the market. As a result, the
Company has committed significant personnel time and financial resources to its
development of the DDRL program. Throughout fiscal 1995 and 1994, management
was identifying key personnel, developing internal policies and procedures,
enhancing data processing systems, developing the marketing and pricing liter-
ature for the Dealers, obtaining the necessary financing, and testing system
capabilities and capacities. During the first half of fiscal 1996 and into the
third quarter, management was in the process of opening a revolving credit
facility with Bank One, Columbus, NA (in July), creating (in July) the special
purpose companies and combination origination-and issuer-trust (a "Carlson
Trust") to enable ABS lease securitizations, closing (in August) the preferred
stock offering needed to begin operations under the program, recruiting (in July
and August) additional marketing personnel necessary to adequately service the
Washington market, and commencing initial operations.
On August 17, 1995, the company began full-scale DDRL activities with initial
local marketing representation in Olympia, Tacoma and Spokane, Washington.
Later the Company added representation in Seattle, Washington, and it is now
recruiting marketing representatives in Oregon and Idaho. As a Dealership is
signed to a non-exclusive contract and as it develops customers interested in
leasing through Republic, the Dealership sends credit applications to the Com-
pany, which are reviewed with the assistance of the Company's proprietary credit
scoring system, developed by Fair, Isaac, which is used in conjunction with
Republic's Lease Accounting and Securitization Income Reporting ("LASIR") system
to evaluate, capture and track the lease transaction. While the industry stan-
dard for application review and response is approximately one hour, the Company
is generally responding within 30 minutes to an application unless questions
occur which require a response from the Dealer. In October, the Company intro-
duced a new service, Republic Gold, which allows selected Dealers to make
instantaneous credit approvals on the Company's behalf after determining the
customer's credit-worthiness by comparing certain customer attributes to a set
of simplified and objective standards.
The Company has agreed (in September) with First Community Bank to provide
access to the Automated Clearing House payment system ("ACH") to allow its
customers to make their monthly lease payments automatically and to enable the
Company to electronically make payments to its Dealers for the leased vehicles.
The Company has agreed (in November) with Northwestern Trust and Investors
Advisory Co., Inc. to provide trustee services to the Company's special-purpose
affiliate (WESTAR) which is intended to facilitate securitization of the leases
through an arrangement provided to the Company through The Industrial Bank of
Japan ("IBJ").
In anticipation of public trading of its common shares, in September the Company
registered under the Securities and Exchange Act of 1934. The Company agreed
(in September) with Pacific Crest Securities that Pacific Crest will become a
market maker in the Company's registered common shares, that Pacific Crest will
act as an exclusive investment banking representative in an anticipated private
placement, and that Pacific Crest will act as lead underwriter or co-manager of
any public equity offering during a specified period of time.
In November, the Company began its initial draw-down under the $12 million,
three-year Bank One warehouse facility.
The decrease in revenues during the second quarter of fiscal 1996 as compared to
the same quarter in the previous year is primarily due to a decrease in lease
sales to other institutions in the second quarter of fiscal 1996 . The increase
in revenues in the first half of fiscal 1996 were a result of sales of commer-
cial leases during the first quarter of fiscal 1996. During that period, the
Company recorded $885 thousand in revenues from leases sold to a preferred
stockholder, T&W Leasing, Inc. ("T&W"), through a program implemented in
October, 1994. There were no similar sales during the first quarter of fiscal
1995 and only limited sales during the first half of fiscal 1995. Leases sold
to T&W in the first quarter of fiscal 1996 represented substantially all of the
remaining leases in the Company's commercial lease portfolio and reflects the
Company's intent to commit virtually all of its resources to the DDRL program.
The Company has retained the servicing of the leases sold.
Direct costs also decreased significantly in the second quarter of fiscal 1996
as compared to the same quarter of the prior year due, again, to the decrease in
leases retained compared to the year earlier. Decreases in depreciation
expense, interest expense and the provision for credit losses are a result of
the smaller commercial lease portfolio. For the first half of fiscal 1996
direct costs decreased proportionately due to greater margins achieved through
higher pricing on the sale of leases.
General and administrative expenses increased $75 thousand (12%) during the
second quarter of fiscal 1996 from the year earlier primarily as a result of
increased overhead related to expansion of the DDRL efforts. Management
expects the current level of general and administrative expense, designed to
support increased operations as additional dealers are signed to the program,
will increase only slightly in the near future as the Washington market is fully
assimilated, but will grow further when expansion outside of Washington occurs.
In June 1995, the Company negotiated an early termination of certain non-
recourse debt resulting in the gain on extinguishment, net of tax, of $44
thousand which has been recorded as an extraordinary item in the first quarter
of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Assets decreased from the prior year due to sales of commercial leases in the
first quarter of fiscal 1996. This redeployment of assets and reduction of
liabilities in anticipation of full scale DDRL activities resulted in a substan-
tial increase in cash provided by investing activities as sold commercial leases
were not replaced by investments in new commercial leases and a decrease in cash
provided by financing activities as the proceeds from sales were used to reduce
bank borrowings. The Company intends to finance many of those same assets in
the Bank One facility prior to securitization.
In December 1993, the Company's Board of Directors designated a series of
redeemable preferred stock and has since designated three additional series for
a total authorized redeemable preferred stock capital of $4.3 million. Three
of the series have similar rights and preferences. The fourth series is similar
but is entitled to nominate and elect a director to the Board. Initial proceeds
from the preferred stock offerings were used for the development of DDRL and to
fund current operations and initial lease originations during the development
period. In anticipation of increased DDRL activity and the initial funding from
the Bank One facility, the Company also used proceeds from the sale of preferred
stock to pay down the bank borrowings which supported the remaining commercial
lease portfolio and some of the initial DDRL leases created in the market test
during 1994 and 1995. Future proceeds will be used for current operations, fur-
ther development needs of DDRL and the equity portion of the Company's invest-
ment in leased assets. Subsequent to year end, the Company issued an additional
$1.475 million of redeemable preferred stock and expects to issue up to an addi-
tional $975 thousand in the third quarter of fiscal 1996.
Liquidity sources for current operating needs (including interest on bank bor-
rowings, dividends on preferred stock and general and administrative expenses)
consist primarily of future lease payments and residuals and the right to borrow
against leases from the warehouse facility. In addition, the Company has the
ability to sell the stream of payments and underlying assets of leases in its
portfolio as a means of supplementing current cash needs. Further, the Company
intends to securitize its production of consumer leases as soon as it has
acquired a sufficient quantity of leases. The proceeds from the preferred stock
offerings coupled with the Bank One warehouse facility will provide the funds
necessary for acquisition of new lease originations. The net proceeds from the
securitizations in the IBJ facility of up to $100 million will also provide
funds for current operations and future lease originations.
It is the opinion of management that, as of September 30, 1995, the liquidity
sources discussed above are sufficient to meet the Company's liquidity needs for
fiscal 1996 operations and for purchases of leases in the normal course of
business.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
The shareholders passed a resolution amending the Designation of Rights and
Preferences ("Designations") for the Series 1, 2 and 3 Preferred Shares and
approving the Designation of the Series 4 Preferred Shares.
The amendment to the Series 1, 2 and 3 Preferred Shares grants the preferred
shareholders the right to elect the Board of Directors in the event of the
occurrence of certain defaults of the provisions of the Designations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1994 Annual Meeting of Shareholders was held on September 25,
1995. R.W. Christensen, Jr. was re-elected to the Board of Directors for a
three-year term. Directors, whose terms of office continued subsequent to the
meeting were Cathy L. Carlson, Joel I. Davis, Robert L. Lovely and Charles S.
Seel.
Other matters voted upon at the meeting included adoption of the Company's 1994
Stock Option Plan and an amendment to the Company's Articles of Incorporation
which granted the outstanding preferred stock shareholders the right to call a
special meeting of shareholders and to elect a majority of the Company's Board
of Directors upon the occurrence of certain events.
The number of votes cast for, against, withheld or abstained, as applicable, for
the various matters voted upon are summarized in the following table:
Director Stock Option Plan Articles of Inc.
---------------- ---------------------------- ----------------------------
For W/H For Against Abstained For Against Abstained
------- ------ ------- ------- --------- ------- ------- ---------
421,012 35,510 386,361 49,161 21,000 396,911 41,311 18,300
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) No exhibits required.
b) The Company filed a report on Form 8-K on September 22, 1995. The Company
reported two items under Item 5, Other Events: 1) Pacific Crest Securities'
agreement to commence market making activities for the Company's common stock
on November 12, 1995 and 2) an agreement with Pacific Crest Securities ("PCS")
whereby PCS will act as the exclusive investment banking representative and
financial advisor to the Company to raise non-bank, non-ABS capital for the
Company.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the Regi-
strant has duly caused this Report to be signed on its behalf by the under-
signed, thereunto duly authorized.
REPUBLIC LEASING INCORPORATED
November 8, 1995 R. W. Christensen, Jr., President
(Date) (Signature)
November 8, 1995 C. L. Carlson, Vice President, Finance
(Date) (Signature)
<TABLE>
<CAPTION>
APPENDIX A
Consolidated Balance Sheet
as of September 30, 1995 and March 31, 1995
(Unaudited)
September 30 March 31
<S> <C> <C>
Cash $ 89,349 $ 55,277
Accounts receivable, net of allowance
for credit losses 216,096 157,370
Due from affiliate 79,495 43,526
Lease receivables 124,233
Lease repurchase agreements 1,080,538 1,133,992
Net investment in direct finance leases, net of
allowance for credit losses 869,823 1,789,712
Equipment held for lease, net of accumulated
depreciation 42,089 199,157
Deferred Federal income tax asset 603,551 451,664
Other assets 433,271 356,077
--------- ---------
Total Assets $ 3,414,212 $ 4,311,008
========= =========
Accounts payable $ 164,662 $ 123,027
Notes payable to banks:
Recourse 1,485,773
Nonrecourse 394,835
Amounts payable under lease repurchase agreements 1,072,332 1,129,031
Other 61,291 129,907
--------- ---------
Total Liabilities 1,298,285 3,262,573
--------- ---------
Redeemable Preferred Stock 3,275,000 1,800,000
Common Stock:
Par Value 690 690
Additional paid in capital 794,505 794,505
Accumulated deficit (1,954,268) (1,546,760)
---------- ---------
Common stock equity (1,159,073) (751,565)
--------- ---------
Total Assets and Stockholders' Equity $ 3,414,212 $ 4,311,008
========= =========
<CAPTION>
Consolidated Statement of Operations
For the three and six months ended September 30, 1995 and 1994
(Unaudited)
Three Months Ended Six Months Ended
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues:
Earned income-direct financing
leases $ 18,130 $ 104,209 $ 63,466 $ 191,370
Operating leases 4,659 72,562 21,908 150,378
Earned income-lease receivables 76 9,035 2,913 21,573
Proceeds from sales of equipment
and leases 171,592 468,172 1,090,662 612,286
Other income 40,699 29,911 71,744 95,443
------- ------- --------- -------
Total revenues 235,156 683,889 1,250,693 1,071,050
------- ------- --------- ---------
Direct Costs:
Depreciation of equipment
held for lease 1,766 40,972 11,404 88,916
Interest 12,342 97,009 55,562 174,516
Cost of equipment and leases sold 138,072 466,940 1,065,673 583,457
Provision for (recovery of)
credit losses 4,142 23,364 (26,108) 52,356
Other 2,752 4,576 9,512 7,454
------- ------- --------- -------
Total direct costs 159,074 632,861 1,116,043 906,699
------- ------- --------- -------
Net revenue over direct costs 76,082 51,028 134,650 164,351
General and administrative expenses 360,310 284,989 652,900 620,302
------- ------- --------- -------
Loss before income tax benefit
and extraordinary item (284,228) (233,961) (518,250) (455,951)
Deferred Federal income tax benefit 94,731 174,407
------- ------- ------- -------
Loss before extraordinary item (189,497) (233,961) (343,843) (455,951)
Gain on extinguishment of debt,
net of deferred tax 43,714
------- ------- ------- -------
Net Loss (189,497) (233,961) (300,129) (455,951)
Dividends on redeemable
preferred stock (62,711) (21,391) (107,379) (47,903)
------- ------- ------- -------
Net loss applicable to
common stock $(252,208) $(255,352) $(407,508) $(503,854)
======= ======= ======= =======
Net loss per share $ (.37) $ (.37) $ (.59) $ (.73)
=== === === ===
<CAPTION>
Consolidated Statement of Cash Flows
For the six months ended September 30, 1995 and 1994
(Unaudited)
1995 1994
Net cash provided by (used in) operating activities $ (300,129) $ (54,237)
------- --------
Cash flows from investing activities:
Recovery of equipment costs and residual interests 1,207,670 1,369,081
Purchases of equipment for lease (147,692) (2,810,431)
Other (82,431) (102,459)
--------- ---------
Cash (used in) provided by investing activities 977,547 (1,543,809)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of redeemable preferred stock 1,475,000 300,000
Additions to notes payable to banks 1,135,205
Proceeds from leases sold under repurchase obligations 115,850 1,179,644
Payments on notes payable to banks (1,880,608) (1,110,093)
Dividends paid on preferred stock (82,375) (62,010)
--------- ---------
Cash provided by financing activities (372,133) 1,442,746
--------- ---------
Increase (decrease) in cash 34,072 (155,300)
Cash:
Beginning of period 55,277 183,852
--------- ---------
End of period $ 89,349 $ 28,552
========= =========
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. The 1995 Annual Report on Form 10-K of the Company includes a summary of
significant accounting policies and should be read in conjunction with this Form
10-Q. The consolidated financial statements include the accounts of Westar Auto
Holding Co., Inc. ("WestAH"), a 100%-owned subsidiary of the Company, Westar
Auto Finance L.L.C. ("WestAF"), a limited liability company owned 99% by the
Company and 1% by WestAH, the Westar Lease Origination Trust, a Washington busi-
ness trust who's beneficiary is WestAF and Westar Lease Services, Inc., also a
100%-owned subsidiary of the Company. All of which are newly formed entities in
July 1995. The statements for the three and six months ended September 30, 1995
and 1994, are unaudited, condensed and do not contain all information required
by generally accepted accounting principles to be included in a full set of an-
nual financial statements. In the opinion of Management, all adjustments (con-
sisting only of normal recurring adjustments) necessary to present fairly the
results of operations for such periods have been included. All significant
intercompany balances and transactions have been eliminated. The results of
operations for the three and six months ended September 30, 1995, are not neces-
sarily indicative of the results of operations for the entire year.
2. The Company paid cash for interest of $85,876 and $171,924 for the six
months ended September 30, 1995 and 1994, respectively.
3. Earnings per share are computed using the weighted-average number of common
shares outstanding. Net loss used in the computation of earnings per share has
been increased to include the required amount of dividends on the redeemable
preferred stock of $107,379 and $47,903 for the six months ended September 30,
1995 and 1994, respectively. Earnings per share does not include common stock
warrants or common stock options as the effect would be anti-dilutive.
